Markets Live: Shares gain ahead of China GDP

Patrick Commins, Max Mason

Stocks rallied on signs the world’s biggest economy is growing and confirmation from the Reserve Bank of Australia that interest rates are set to remain steady.

The benchmark S&P/ASX 200 Index lifted 29.3 points, or 0.6 per cent, on Tuesday to 5388.2, while the broader All Ordinaries Index added 0.5 per cent to 5380.3.

Local shares followed markets in the United States higher after official figures showed retail sales rose 1.1 per cent in March, beating expectations for a 0.9 per cent lift while February ‘s figures were also revised higher.

A fall in Hong Kong’s Hang Seng dampened trade in the afternoon session.

“While we are heading into a traditionally weak season for shares there is no reason to be concerned the local market is set to follow a hard pullback in US equities,” Macquarie Private Wealth senior equities adviser Sean Conlan said.

Utilities and consumer staples were the best-performing sectors, both up 0.9 per cent, as investors favoured defensive stocks.

Minutes from the RBA’s April meeting assured investors it plans to keep the official interest rate at its current record low of 2.5 per cent until there is more compelling evidence of jobs growth.

Westpac Banking Corporation was the biggest winner among the banks up 0.6 per cent to $34.37. Commonwealth Bank of Australia, ANZ Banking Group, and National Australia Bank each rose 0.5 per cent to $76.90, $33.52, and $35.06 respectively.

Despite being famed as some of the most expensive financial stocks in the world Mr Conlan said Aussie bank stocks are not overvalued. “Heading into dividend season next month the banks should continue to be well supported,” he said.

Global equities fund manager Magellan Financial Group was the best-performing stock in the ASX 200, rallying 6.2 per cent to $12.08 after losing nearly 13 per cent over the previous two sessions in response to the pullback in US stocks over the past week.

The Reserve Bank has refrained from talking down Australia’s dollar in the minutes from its monthly board meeting, despite it hovering at five-month highs and being in the “pain range” for exporters.

The Aussie remained steady, a touch below US94 cents, after RBA officials said there were ‘‘early promising signs’’ of the economy shifting away from mining-led growth.

In minutes from its April meeting, the RBA said it was in no hurry to lift interest rates, sticking with its mission of providing a ‘‘period of stability’’.

This is in contrast to its strong jawboning of the Aussie in December when the currency fetched an average of US89.78 cents and commodity prices were higher.

The change in thinking has caused some strategists to suggest the Aussie would have to rise to US 97 cents again before the RBA would start talking down the currency again.

JP Morgan chief economist Stephen Walters said there were two ways to interpret the RBA’s ‘‘new-found timidity’’ on the Aussie.

‘‘Perhaps officials are comfortable with AUD above 94 [cents] against USD, but this would be odd given they described AUD as ‘uncomfortably high’ back in December, when AUD was several cents lower and commodity prices were higher,’’ Mr Walters said.

‘‘The more plausible interpretation, then, is that officials believe jawboning would be effective only in the very near term, or perhaps not at all in current circumstances.

‘‘They may be hoping AUD aligns with fundamentals unaided, or perhaps are saving their jawboning for a more opportune time. If now is not opportune, though, when will it be?’’

Heated debate about the stock market being rigged has dragged on since the publication of "Flash Boys," Michael Lewis' book about high-frequency traders.

But there's another set of players on Wall Street who may not be giving regular investors their fair share: ETF managers.

Consider the iShares Nasdaq Biotechnology ETF, ticker IBB, which has pulled back sharply in the recent tech sell-off after rocketing 65 percent higher in 2013.

What may surprise some investors is how BlackRock, the manager of IBB, generates extra income: By lending the ETF's stocks to short sellers.

That practice can generate significant income for smaller stocks because short sellers will sometimes pay hefty fees for the right to borrow them.

At the end of September, the most recent reporting period available, IBB had lent out shares worth $651 million, or about 16 per cent of the ETF's assets.

First, the idea that an ETF is helping short sellers bet against its shares might not sit well with IBB investors, especially in light of the recent sell-off. But an arguably more important question is how much of the stock-lending income actually went back to ETF investors and how much BlackRock kept for itself.

In the six months through September, IBB generated $5.48 million in securities lending revenue. Some $3.56 million, or 65 percent of the total, went back into the ETF itself. But BlackRock kept the remaining $1.92 million for itself.

And that's a wrap for the day's trading, with shares locking in some reasonable gains today after yesterday's carnage.

The ASX 200 index closed 29 points, or 0.5 per cent, higher to 5388.2, while the All Ords advanced 27 points to 5380.3.

A 1.1 per cent gain in BHP was the biggest single booster for the market, although financials as a group had the biggest influence after the major banks recorded gains of around 0.5 to 0.6 per cent and AMP closed 1.4 per cent higher.

Metals and mining advanced 0.7 per cent, although the gold mining segment retreated 2.5 per cent after Newcrest slumped 2.8 per cent.

Other drags on the market came courtesy of James Hardie, down 1.7 per cent, and Sydney Airport, down 1 per cent.

Defensive corners of the market like consumer staples and utilities fared the best, both gaining 0.9 per cent.

Great research note out today from analysts at Bank of America/Merrill Lynch, who have used Porter’s classic “Five Forces” analysisto assess the industry structure and relative position of the top 100 listed companies within their respective markets.

They used a scorecard to classify the stocks into four groups (as per the chart below):

- Strong fortresses, or companies which operate in industries with strong economic moats (that is, an industry structure that currently protects profitability) and where there is as much if not more upside than downside from evolving industry structure.

“For instance, Transurban (TCL) operates in an industry with high barriers to entry, little substitution and no competition (ie, a monopoly). This gives the company strong bargaining power over customers and suppliers,” writes the analysts.

- Vulnerable fortresses are as above, except there is more downside than upside ahead.

“For example, major banks operate in industries with strong industry structure (high barriers to entry and good power over suppliers). But the sector could be subject to heightened competitive rivalry in a low credit growth environment.”

- Strong battlers operate in industries with weak economic moats, but with odds of things getting more rather than less favourable.

“For example, Macquarie (MQG) currently operates in a highly competitive landscape, which gives customers enhanced bargaining power, but this could improve with industry consolidation.”

- Vulnerable battlers – you get the idea.

“Asciano (AIO) is an example of a company operating in an industry with weaker than average structure and is likely to face further structural pressures from intensifying competition.”

“Transurban, Flight Centre, Cochlear, Sonic Healthcare, Woolworths, QBE, AGL and Computershare are undervalued stocks that also provide reasonable earnings growth over the next three years,” they write.

Bank of America/Merril Lynch's analysis of the top 100 stocks using Porter's classic framework for analysing industry structure.

3:45pm on 15 Apr 2014

Australian fund managers are slightly underperforming the broader market so far this year despite the economy slowly gaining traction, according to an investment survey.

In the three months to March, funds tracker Mercer found the median Australian fund manager underperformed the ASX by 0.1 per cent.

Weak returns were across the market, according the survey, with the benchmark index rising a ‘‘modest’’ 0.2 per cent in March.

Although the fund managers generally underperformed, Mercer said in the past year they have delivered solid results, outperforming the broader market by 2.3 per cent.

This compares with positive results in the past three and five years, with fund managers outperforming the benchmark index by 1.5 and 0.9 per cent respectively.

Fund managers look set to deliver better returns later this year as the economy strengthens thanks to rising house prices and an improving domestic labour market, the Mercer survey found.

But gains will be limit, with a ‘‘significant slowing’’ in China and a brutal budget expected from federal Treasurer Joe Hockey, undermining growth.

Large caps only delivered a 0.3 per cent return in March, with mid caps also rising 0.3 per cent and small caps dropping 1.2 per cent.

The worst performing sectors were materials and consumer staples, which were down 3.2 and 2.1 per cent respectively.

Mercer said it retained a bias to risk assets. It said stock valuations were no longer expensive, but should be supported by ‘‘slowly strengthening’’ recovery in global GDP growth and corporate earnings.

There was no "jawboning" to try and get the Australian dollar lower by the Reserve Bank in the minutes from their latest board meeting, but it’s also very clear they aren’t in any hurry to raise interest rates.

This is probably just as well, with the local dollar hovering close to US94 cents, up more than one US cent since the RBA met earlier this month.

At that lofty level it’s starting to act as a handbrake on the economy so talk of a rate hike anytime soon is hardly welcome. Traders will now focus on next week’s first quarter inflation report that could result in a higher headline number due to seasonal factors.

The $A is still high by historical standards, and could rise further if inflation comes in higher than expected, but the bank also noted in the minutes on Tuesday that on a trade weighted basis it’s still around 12 per cent below its peak of a year ago.

A run of better than expected economic data has led to a buying spree in the $A and the latest data from the US Commodity Futures Trading Commission figures, familiar to currency strategists, shows that traders have gone net long the dollar for the first time since May, 2013.

A key driver of that turnaround, in the face of falling commodity prices over the past month, is a bet the RBA will be hiking sooner than later.

But the minutes show there is going to be a “period of stability” and "the cash rate could remain at its current level for some time if the economy was to evolve broadly as expected".

Those three words "for some time" suggests the bank want to keep rate hike expectations as low as possible for as long as possible.

David Jones has appointed independent expert Grant Samuel to assess whether a $2.15 billion takeover offer from South African retailer Woolworths is in the best interest of shareholders.

Grant Samuel will consider whether Woolworths’s $4 a share cash offer is fair and reasonable and is likely to compare the value of the offer against the value that David Jones could create if it remained an independent company.

The firm is also likely to take into account the value of David Jones’s property portfolio, which is in the books at $612 million but could be worth between $650 million and $1 billion if the four CBD properties were redeveloped or air rights exploited.

David Jones’s chairman Gordon Cairns recommended the offer last week, after three weeks of talks with South Africa’s largest retailer, led by former Country Road Group chief executive Ian Moir.

If the independent expert finds the deal is not fair, reasonable and in the best interests of shareholders, David Jones will not be obliged to proceed.

The David Jones board weighed up the Woolworths proposal against the value that could be created through David Jones’s own five-year strategic plan, a nil-premium merger proposal from Myer and realising the value of the property portfolio.

The board came to the conclusion that the offer was worth significantly more than David Jones’s intrinsic value, which was estimated to be less than $4 a share.

You open your work inbox and under the subject line “please do not take up this offer” is a promise to pay you $2000, plus four weeks' pay, if you'll leave the company today.

Would you?

It's a reverse psychology question that Amazon CEO Jeff Bezos asks all his salaried staff. He even increases the offer by $1000 every year, up to $5000, just to be sure that the employees who work for him do so because they want to.

Bezos shared the “pay to quit” strategy in his annual shareholder letter released last week, revealing it was first introduced to the company by Zappos, an online shoe store acquired by Amazon in 2009.

Does he want them to take the kiss-off money and run?

Far from it. It's a carrot to help staff resolve a question that niggles at many employees from time to time – would I be better off working somewhere else?

Those who decide to knock back the cash and stay put are more likely to approach their work wholeheartedly, Bezos reasons.

'The goal is to encourage folks to take a moment and think about what they really want,” he writes. “In the long run, an employee staying somewhere they really don't want to be isn't healthy for the employee or the company.”

Convicted inside trader and former Gunns Ltd chief, John Gay, has won permission to direct companies again, eight months after he was disqualified.

Mr Gay, 70, was given leave in the Tasmanian Supreme Court to direct two companies - a trustee company, and the family trust's sole asset - a $2.9 million turnover timber veneer business.

"Mr Gay is the driving force behind the veneer business," Justice Robert Pearce said on Tuesday. "There is no appreciable risk that he will reoffend.

"His management of the companies poses no risk to the public and to the interests of the shareholders, creditors and the 21 employees of the company.

"To the contrary, without the benefit of his experience, knowledge and expertise there is a prospect that their interests may be adversely affected."

Mr Gay was fined $50,000 and banned from directing a company when he was convicted of selling 3.4 million Gunns shares in late 2009 while he had price sensitive information, in a sale that netted around $800,000.

Mr Gay pleaded guilty to the offence on the basis that he ought reasonably to have known that a management report in his possession showing a slump in company revenue was inside information.

A crackdown in China on financing backed by commodities risks unleashing a flood of iron ore sales from tens of millions of tonnes of the raw material sitting at Chinese ports, raising the prospect of a renewed price slump.

Investors who have raised funds against mostly unhedged iron ore could be at risk in the event of a price fall due to sluggish steel demand, leading to forced sales as banks wind back loans against the raw material, analysts and traders warned.

Beijing's moves to tighten access to credit have led to buyers defaulting on about $300 million of soybean imports in recent weeks, while fears of an unravelling of copper financing deals helped push the metal to a three-and-a-half year low in March.

Iron ore prices have recovered after slumping 8 per cent in a single day to a 17-month trough last month as steel prices plunged, but a fragile outlook for steel consumption in China and towering port stocks mean the steelmaking raw material remains vulnerable to another rout.

Iron ore port stocks stood at a near record above 108 million tonnes last week, enough to build almost 1200 New YorkEmpireState buildings.

"A big crisis has passed, but with the high inventory, the risk is still there for iron ore prices," said Helen Lau, senior mining analyst at UOB-Kay Hian Securities in Hong Kong.

"It's all subject tohow fast steel demand will recover going forward, and what I see is a mild recovery."

Commodities such as copper and rubber have been commonly used for financing, where traders or investors borrow against the commodity with the aim of investing the money in high-return areas such as real estate.

Broker Morgans has put out a note on its “high conviction ideas” that play what they see as the 10 major market themes in 2014. (See table below.)

Of special interest to dividend-loving Aussies is the Morgans’ analyst team’s expect Suncorp to pay a special dividend of about 20 cents per share in August, with the potential for more next financial year given around $1.1 billion of excess capital, which could increase if the Queensland-based bank and insurer achieves advanced accreditation under the Basel III regulatory capital rules.

The analysts suggest investors switch out of IAG – given general insurance margins are at cyclical highs and their expectation of low sigle-digit premium growth.

They also prefer Suncorp for its greater earnings diversity.

Turning to the market more broadly, the analysts believe the ASX 200 looks “fully valued” at 15.2 times consensus estimates for FY15 (about 10 per cent above its 10-year average), but with the economy improving they believe there’s still scope for about 9 per cent gains by the end of the year.

“We think that underlying economic fundamentals both here and in the US are highly supportive for equities,” they write.

But they are more worried about US shares in the immediate term, which “look stretched” and are “running in low momentum”.

“With ongoing uncertainty around the pace of QE tapering versus future rate rises, we think that weak US quarterly GDP numbers expected at the end of April could easily provide the excuse markets need for a 5-10 per cent correction.”

“We would see any realisation of the “sell in May and go away” phenomenon as an buying opportunity.”

Morgans analysts' high conviction ideas.

12:15pm on 15 Apr 2014

As many of our readers already know, Commonwealth Bank customers were unable to access their funds this morning because of a nationwide system outage.

The bank took to social media to confirm the outage, which appears to have affected most of its services, including EFTPOS, internet banking, online trading through CommSec and telephone banking.

"We're currently experiencing system problems. We have identified the issue and are working to restore services as a high priority," the bank said on its Facebook and Twitter accounts late on Tuesday morning.

"We will update with more information soon and apologise for any inconvenience caused."

Interest rates look set to stay put while the Reserve Bank waits to see what effect the stubbornly high currency will have on Australia’s economic growth.

The just-released minutes of its April meeting show the RBA decided to leave the cash rate at a record-low 2.5 per cent, believing the most prudent course would be ‘‘a period of stability in interest rates’’.

‘‘The Board’s judgment was that monetary policy was appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the two to three per cent inflation target,’’ the RBA said.

‘‘The Board had judged that it was prudent to leave the cash rate unchanged and members noted that the cash rate could remain at its current level for some time if the economy was to evolve broadly as expected.’’

The RBA said that domestic growth in 2013 had been below trend but that low interest rates were supporting domestic activity.

Public demand had made a ‘‘surprisingly strong contribution to growth’’ but planned fiscal consolidation in upcoming federal and state budgets was likely to weigh on public demand for some time, the RBA said.

But while falling mining investment and weak public demand would constrain growth for some time, there were ‘‘early promising signs’’ in other parts of the economy.

‘‘A strong pick-up in dwelling investment was in prospect and there was some evidence that consumer demand had strengthened a little,’’ the RBA said.

Australians will become some of the oldest workers in the world if the government lifts the pension age to 70.

Data from the OECD shows if Australia lifts the pension age to 70 – as indicated by Federal Treasurer Joe Hockey on Sunday – it will be doing so years before other countries finish lifting theirs to 67.

Mr Hockey gave his clearest signal yet on Sunday that Australia’s pension age could rise to 70 in the budget, saying his generation would have to work for longer to prevent serious future budgetary stresses from an ageing population.

His plan has been heavily criticised by seniors and the Labor Party, with opposition spokeswoman for families Jenny Macklin saying the legislated rise to 67 had not begun yet, and the government would need to account for serious age discrimination in the workplace before lifting it to 70.

But the Productivity Commission and the Grattan Institute both support lifting the age to 70, saying it is reasonable in the face of an ageing population.